Not so straight forward: accessing payments systems

Been sitting on a draft and twiddling over it. Thanks to readers for their patience while I try to emerge out of what feels like a long writers block!

Multiple parties control access to payment systems

In this post, I define payment systems as infrastructure that enables payment flows between multiple parties. For payment flows, I focus on consumer to business payment flows, and primarily on the business collecting payments.

There are multiple parties controlling access to payments systems. One possible way to understand a payment system is as a funnel that starts out wider, and then narrows at each layer.

The first layer is the government, the next layer is regulated institutions, comprising traditional institutions (banks, global remittance players), or technology disruptors (known as “fintechs”). Access criteria starts more expansive, and then narrows based on each layer’s risk appetite. A business’s (red house shaped icon in the diagram) final access to the payment system is controlled by a combination of all the criteria set by the different layers in the system.

An example of a gambling/betting company

• Government: The government (represented by the green box in the above diagram) legalises gambling.
• Regulator: The regulator (represented by the blue box in the above diagram) defines a licence framework and requirements, and gives licences to select gambling companies who meet the requirements.

However, a licence does not guarantee that the licensed gambling companies are able to access banking or payment processing services, as access depends on the risk appetite of the next layer, the financial institutions (represented by the purple box in the above diagram).

• Financial institutions (represented by the purple box in the above diagram) some financial institutions may decide that the risk of providing bank accounts to a gambling business is too high, and that they do not want their brand to be associated with gambling. So, only a limited group of financial institutions would be willing to support bank accounts for licensed gambling companies.
• Other financial institutions that enable businesses to collect consumer payments (known as “payment processors”) have to decide if they are willing to support the gambling business. They have to consider payment network policies, and their own risk appetite. For instance, while Visa may be open to Visa debit cards being used to place bets, a payment processor (e.g., Stripe, Adyen) may not be. Hence, each layer’s risk appetite narrows the set of services available to the gambling business.

Access to payment systems are controlled by industry players, based on their analysis of information, and judgement of what is the acceptable use of their services. So even if a business is legal, there still isn’t a straight forward path to access payment or banking services. They could be rejected or have services suspended/paused and off boarded.

Open questions

Should financial institutions support “high risk” businesses? That’s probably up to the risk committee weighing the benefits (higher margins) vs costs (monitoring, brand risks). More interestingly, what defines “high risk”? I picked an easier example of gambling, but what about fundraising platforms for different causes? Should a regulator compel financial institutions to take a more expansive view on what’s supportable? If financial and payment systems are essential infrastructure like electricity, roads, rail, water, then arguably access should be widened to high risk businesses. If it’s a non essential, then maybe not.

Overall, I vacillate most days with this personal litmus test. Is there a cause that you disagree with vehemently, but is not illegal? On the flip side, is there a view you hold that others disagree with vehemently? Should both causes be able to fund raise globally and further their views? I think it should work both ways, and hence lean towards supporting more expansive access.